Commentary

Crisp air, playoff games and tech profit warnings

Commentary: AMD news presages more of same

By

JohnShinal

SAN FRANCISCO (MarketWatch) — Check your calendars, tech investors. October baseball begins this weekend. Crisper air, better pitching and lots of drama are nigh. Now that the Boston Red Sox have gone back to being the Red Sox, it’s a good time to remember that some things can be counted on this time of year.

One of them is a coming spate of quarterly earnings pre-announcements in the tech industry. This is the end of the third quarter, after all, when Wall Street types who’ve been telling clients to buy — on optimism for a strong second half — must now turn and face the music.

Given the optimism baked into current earnings estimates, the chances for negative surprises look stronger than those for positive ones, in my view.

Earlier this month, we talked about how Wall Street expects tech companies in the S&P 500 Index
SPX, -1.54%
to post full-year profit growth just shy of 22%. That’s a bullish number, given the reasonable forward-looking, price-to-earnings ratio of the sector. But we also went into why you should be cautious nevertheless. Read how earnings growth in tech is slowing substantially.

Since then, the Nasdaq Composite Index
COMP, -1.94%
has gone sideways, looking for direction, with traders trying to stay focused on the fundamentals while keeping an eye on the euro zone. Yet that lack of direction will be short-lived with year-end forecasts coming to the fore.

Myth of the ‘back-end loaded’ year

If you’ve even wondered why stocks often get hammered this time of year, it’s due in part to this dynamic: Ever since July, salespeople have been telling their vice presidents that more deals are coming soon, because their bonuses (and perhaps their jobs) depend on it. The VPs tell their chief executives, who then tell Wall Street analysts, who then sell that hope to investors.

If you ever see a report that says “our channel checks reveal the company is set up for a strong second half,” or “we see a back-end loaded year,” please withdraw all your money from that bank or broker immediately — because there’s a 90% chance you’re being fed total BS. (I arrived at the 90% figure while covering networking stocks for Bloomberg in the late 1990s, when I discovered that only about one in 10 analyst reports were credible.)

This dance continues until the people whose moves started it — in tech, that would be those who sell hardware and software — get clear visibility into their year-end numbers; that will be happening over the next week or so. When the figures get passed up the chain of command, all of us will find out whether the hopeful tune heralding a strong finish to 2011 was justified or forlorn.

Downward earnings revisions usually begin with weaker companies, who have nowhere to hide in a faltering economy. This is why we heard bad news from Advanced Micro Devices Inc.
AMD, -2.30%
on Thursday, which cost shareholders about 15% in a day. (I hope not too many of them were Red Sox fans. That’s a lot of pain in a 24-hour period.) Read more about concerns over AMD’s manufacturing issues.

Semis as leading indicator

It would be easy to whistle past the graveyard and call the issue AMD-specific, but those who are selling Intel Corp.
INTC, -1.79%
aren’t sure. If they bought the stock this month, they’re also taking profits off the table, given Intel’s double-digit bounce off its near-term low.

The following news is old, but worth noting in light of the AMD selloff. In the May 23 issue of Barron’s, Steven Sears reported that Goldman Sachs had downgraded Intel to “sell” from “neutral” based on four key factors: declining semi-equipment orders, declining PC shipments, rising notebook inventories and a “dramatic increase” in manufacturing capacity.

The Goldman report was candidly bearish and predicted negative revisions would be coming. From late May until early September, Intel fell 15% — roughly in step with the Nasdaq — until its surprising pop that began three weeks ago.

For all you conspiracy theorists (and I do like to hear good conspiracy theories), that would be called a “pump and dump.” For more idealistic traders, it’s a hope that AMD’s woes are due to Intel’s competitive strength. Either way, we’ll know soon enough.

It’s not just those who trade the capricious market in chip stocks who should pay attention. Semiconductors are the leading edge of the tech food chain. If the weaker players in other subsectors (software, storage, networking gear, etc.) are struggling to load their collective back ends, we may see a lot more painful days like the one AMD investors just saw.

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